Biotech Breakouts: How to Trade Agios Pharma

DELAFIELD, Wis. (Stockpickr) -- The market is struggling to find buyers after key economic data was released that showed new-home sales plunged in March by 14.5%. The March data missed expectations, since most economists were looking for a bump up in new-home sales from February.

Despite the weak action in the market off that terrible new-home-sales data, there are still plenty of stocks that are showing up on my scans that have favorable technical setups and aren't going down with the rest of the market today. Some of these stocks also have a lot of shorts involved in the names, and if the bears can't gain any traction on down days, then you could have a stock that's in high demand with buyers.

One stock that recently had some strong fundamental news and is not going down today is biopharmaceutical player Agios Pharmaceutical (AGIO), which focuses on the development and commercialization of therapeutics in the field of cancer metabolism and inborn errors of metabolism in the U.S. Agios Pharmaceutical has a market cap of $1.5 billion and an enterprise value of 1.1 billion. This company has over $190 million in cash on its balance sheet and zero debt. This stock has been on a tear so far in 2014, with shares up huge by over 100%.

Agios Pharmaceutical recently released some bullish drug trial data, after the company reported that its blood cancer drug, AG-221, showed promising clinical activity for the treatment of cancers with the IDH2 mutation. Agios' trial only showed data from seven patients with acute myeloid leukemia, but six of those patients responded well to AG-221, and three of them had zero traces of cancer in their blood after 28 days on the drug. Wall Street celebrated the results earlier this month, and the stock closed up over 27% on big volume the day of the announcement.

These early trial results for AG-221 are just that: early. But Agios could be on to something big here if it can show positive cancer treatment data in larger trials. If that happens, then this stock could trend significantly higher from current levels. The reasons investors are so excited about AG-221 is due to those three patients that showed no cancer in their blood. That's the type of data that makes Wall Street sit up and listen. Complete remission with a cancer drug is the golden goose for biotech investors and traders.

This company recently announced a number of stock offerings that aimed to raise over $75 million in cash. Those offerings are being done so Agios Pharmaceutical can fund its clinical and research development activities for its cancer metabolism drugs AG-221, AG-120 and AG-348. Investors should celebrate the offerings since they haven't hurt the stock price that much and the overall float for the stock is still very small, so they have not been that dilutive. A small float is important to keeping shares of AGIO attractive if demand for this equity can continue to go up. It's just simple supply and demand: If more people want in and there's little supply in the market, then shares can make giant spikes higher -- especially off any positive cancer drug trials, like we saw earlier this month for Agios Pharmaceutical.

The positive fundamental news is one reason to like shares of AGIO, but in the short term I am really liking the technical setup for the stock. I also really like that there are a lot of shorts involved in this name as the stock is quickly approaching all-time-high territory. No smart short-seller wants to be short a stock that starts to trend into new all-time-high territory, because you just never know how much higher it could go. It's a dangerous game for a short-seller.

If you take a glance at that chart for Agios Pharmaceutical, you'll see that this stock has been uptrending very strong for the last six months, with shares moving higher from its low of $15.77 to its recent all-time high of $49.79 a share. During that uptrend, shares of AGIO have been consistently making higher lows and higher highs, which is bullish technical price action. Shares of AGIO recently pulled back off its high of $48.98 a share to its 50-day moving average. The stock held that test of its 50-day and it's now starting to spike higher and move within range of triggering a major breakout trade.

Traders should now look for long-biased trades in AGIO as long as it's trending above its 50-day at $38.61 and then once it breaks out above some near-term overhead resistance levels $48.98 to its all-time high at $49.79 a share with high volume. Look for volume on that breakout that registers near or above its three-month average action of 404,026 shares. If that breakout triggers soon, then AGIO will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $70 a share in the short-term, and possibly well north of $100 a share in the longer-term if we get more favorable drug cancer data.

Make note that shares of AGIO are heavily shorted, since the current short interest as a percentage of the float for the stock is 13.4%. Even after all of the recent stock offerings, AGIO still has a very low tradable float of fewer than 20 million shares. This is a great recipe for a large short-squeeze if AGIO can take out its all-time highs soon with strong volume.

What's great about a heavily shorted stock that breaks out into new all-time-high territory is that all the people who are betting against the shares are going to feel huge pressure to cover their positions since they have made zero profits on their trades. This is why AGIO could squeeze pretty hard and see a sharp move higher very quickly if the stock close into new all-time-high territory soon.

<P/>The bottom line: A short-term trade is setting up here for AGIO that could be a great trading opportunity of the stock breaks out into new all-time-high territory. For the longer term, shares of AGIO could also be very attractive if the company can release more positive cancer drug data. The low float and large short interest makes this a compelling name to watch and trade, so make sure to keep it on your trading radar.

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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.